How Employees Can Be Motivated to Higher Levels of Performance by Better Compensation Packages

According to history, the notion of compensation for work pre-dates to sometime between 10,000 BC and 1,000 BC during the Neolithic Revolution (Wikipedia). Back then, salt was used as payment till around 560 BC when coins came into circulation and money was invented (Wikipeida). Money became widely used as the payment for labour. To date, money is still the main medium of exchange between employer and employee. In today’s highly competitive market, organisations are often faced with increased competition from both domestic and foreign markets. To be able to stay competitive, attract and retain quality employees, it is imperative that the organisation have a compensation package that is valuable to its employees (Naresh 1998).

Although between employer and employee there is an exchange of money for labour, there is a driver which enables the employee to do the required task. The driver is called Motivation. Motivation is defined as the processes that account for an individual’s intensity, direction and persistence of effort towards attaining a goal (Cummings and Staw 1997). Relating motivation and compensation packages is Frederick Herzberg’s two-factor theory. There are two components to motivation and they are intrinsic motivation and extrinsic motivation (Calder and Staw 1975). Extrinsic motivation is motivation gained by externally influenced needs and is therefore for example stimulated by monetary rewards (Frey 1997). Intrinsic motivation indicates that under certain conditions, employees are prepared to undertake a task for immediate need satisfaction or for its own sake (Calder and Staw 1975). For the purpose of this report, the writer shall focus on extrinsic motivation as it links to compensation packages.

Employees typically receive three kinds of compensation rewards from their employing organizations: base pay, benefits and performance pay (Igalens and Roussel 1999; Naresh 1998). For most employees, base pay constitutes the largest component of their total compensation rewards package. It is given to employees based on time worked and not on any measure of output produced or performance contributions. Benefits are generally the second largest component of the employee compensation rewards package. While certain benefits are statutorily required, the remaining are usually negotiated by the employee unions or provided voluntarily by the organization. Benefits are generally given to employees based on how long they have worked for their present employer. Thus, benefits along with base pay help the organisation to attract and retain employees. The last component of compensation rewards is performance pay which is awarded based on some measure of output produced or performance contributions. For most salaried employees, this is given in the form of merit pay increase which is folded into base pay. Merit pay increases are tied to performance ratings of individual employees but generally bear a weak relationship to the organization's economic performance.

With reference to Figure 1 (Lawler 1987), the framework shows that elements in the compensation system, i.e. performance measurement and evaluation, monetary compensation and career concerns links employee performance to their rewards in the form of monetary compensation and promotions. Hence, the framework suggests that rewards affect motivation, which in turn affects effort and ultimately performance.

Compensation and motivation can also be related to Victor Vroom’s Expectancy Theory. Vroom argued that the strength of tendency to act in a certain way depends on the strength of an expectation that the act will be followed by an outcome and on the attractiveness of that outcome to the individual (Robbins, Millett and Marsh 2004). Vroom’s theory second relationship compares the performance and reward relationship. It explores if good performance appraisal will lead to organisational rewards. Research by Vroom have found that many employees see the performance-reward relationship in their job as weak, and the reason is that organisations reward a lot of things besides just performance. For example, when pay is allocated to employees based on factors such as seniority, being cooperative or for “kissing up” to the boss, employees are less likely to see the performance-reward relationship rewarding. Hence the notion that rewards would lead to better performance would seem to be weak, as other than achieving higher performance, employees can obtain rewards through other avenues or they will eventually come.

Motivation can also be affected by an employee’s reciprocity. Reciprocity is the notion that people care about the intentions of others and repay kind acts with kindness and unkind acts with revenge (Fehr and Falk 2002). A study conducted by Hannan 2005, has shown that workers who were paid higher wages